T-Mobile Slams ‘Desperation’ of AT&T’s Pre-Emptive Strike

By Tiernan Ray

The Street today was reacting to AT&T‘s (T) announcement this morning that it will give customers of T-Mobile US (TMUS) credits worth as much as $450 per line to switch to its service if they trade in their smartphone as well.

AT&T shares closed down 15 cents, or 0.4%, at $34.80 today following the announcement, while T-Mobile stock lost $1.09, or 3.3%, to close at $32.28.

The deal was perceived by at least a couple of analysts as a pre-emptive strike against an expected announcement by T-Mobile at the Consumer Electronics Show in Las Vegas next week. That announcement, it has been speculated, may include an offer by T-Mobile to buy customers out of their current cellular contracts.

This is a desperate move by AT&T on the heels of what must have been a terrible Q4 and holiday for them. I’m flattered that we have made them so uncomfortable! We used AT&T’s cash to build a far superior network and added Un-carrier moves to take tons of their customers – and now they want to bribe them back! Consumers won’t be fooled…nothing has changed; customers will still feel the same old pain that AT&T is famous for. Just wait until CES to hear what pain points we are eliminating next. The competition is going to be toast!

Jennifer Fritzsche with Wells Fargo, who has an Outperform rating on T-Mobile stock, writes that the deal is in anticipation of the T-Mobile announcement, referred to as “Uncarrier 4.0“:

We believe the timing of this move is very purposeful. There have been many press reports suggesting that TMUS may unveil an interesting marketing approach next week at CES (on January 8) with Uncarrier 4.0. Specifically, speculation has centered around TMUS offering switchers $350 in credit when they switch to TMUS. There has even been some talk of TMUS offering to pay customer’s early termination fees (ETFs) to make this switch. T’s move is clearly a competitive shot to TMUS in an attempt to beat it to the punch.

She does not believe there is heightened risk of a price war:

We understand the headline of this may instill fears of pricing wars looming. We do not believe this is the case. From a margin standpoint, we do not believe this move will be overly disruptive. Keep in mind, in regard to the phone tradein, AT&T is already offering a minimum of $99 or the market value if it is higher for any phone tradein that is less than 3 years old (under this new plan users would only receive $250 for the highest end devices). Additionally, the plans which users come on to must be plans where AT&T is not taking the subsidy hit. We would characterize this press release as more bark than bite and reflective of the ”strategic” competitive responses AT&T has alluded to making in regard to TMUS competitive questions.

Citigroup‘s Michael Rollins reiterates a Neutral rating on AT&T shares, writing that the offer is “reactive” and shows share gains by T-Mobile need to be “taken more seriously:

We believe AT&T’s new promotion specifically targeting T-Mobile is both reactive against continued advertising by T-Mobile that targets AT&T customers specifically and pre-emptive against T-Mobile’s potential unveiling of its Uncarrier 4.0 initiative. The trade-in value of $250 is somewhat consistent with recent promotions by AT&T, whereas the $200 switching credit is new. If customers are willing to bring their own device or pay up-front for the device cost, customers that switch to AT&T and get the credit could switch back to T-Mobile soon after receiving their billing credit, which does create some risk in the longer-term success rate from the promotion [...] Once again, we need to take recent share gains by T-Mobile US more seriously, as we see AT&T’s actions to first commit to service unbundling with the Mobile Share Value Plans and now to target T-Mobile customers with $200 bounties as evidence that T-Mobile has impacted AT&T’s growth aspirations. The promotions increase the risk to AT&T’s revenue growth as the company is implicitly giving up the potential benefits of a lengthening device cycle to unbundle device sales from service plans and to offer bounties or subsidies on its no-contract programs (which were supposed to be avoided with service unbundling). We also see risk to the industry environment as T-Mobile’s Uncarrier 4.0 could prompt further competitive responses from Verizon [Communications (VZ)] and Sprint (S) that both employ rate plan architectures that preserve the upside from a lengthening device cycle, even though they offer a flavor of unbundled service plans. From a regulatory perspective, the growing examples of competitive responses to T-Mobile promotions probably strengthens the regulatory case to sustain 4 national carriers. Rising price-based competition may also add risk to valuation multiples for wireless in the near-term.

Nomura Equity Research‘s Adam Ilkowitz also reiterates a Neutral rating on AT&T today, while writing that the incentive may actually sway some T-Mobile users to AT&T:

It may prove attractive to customers who are willing pay a bit more to take what could be perceived as a bigger, better-quality network. T-Mobile remains the most aggressive on service pricing, but AT&T Mobile Share Value compares favorably when including the JUMP service fee.

Ilkowitz thinks the looming announcement by T-Mobile next week, combined with today’s move, signals new competitiveness in wireless, writing “Enticing customers to switch from competitors is commonplace in other consumer businesses, such as promotional triple-play bundle offers in the wireline space” but “would be fairly new to wireless globally, as competition has generally been focused on service pricing and not simply ‘giving money away.’”

Ilkowitz goes through an analysis of how much AT&T or T-Mobile would have to make on a customer if they paid switching costs for that customer. He concludes that “the NPV of theattracted customer is solidly positive in each iteration.”

Here, for example, is how Ilkowitz does the math on T-Mobile’s economics to pay a family of three lines to switch (click for larger image):

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.